NFIB - Higher Taxes Not Included

The release of the National Federation Of Independent Business (NFIB) Small Business Survey for December was much like the report we discussed in November. In short - there were very few positives to be found.

According to the NFIB survey optimism among small businesses crept higher by 0.5% over November's historically low report with a reading of 88.0 which is the second lowest reading since March of 2010. This poor report showed continued deterioration in the labor market, or employment, components and in the surprising number of owners who expect businesses conditions to worsen in the next six months.

The outlook for economic strength is important as it reflects on actions taken by businesses owners primarily in regards to future employment and capital expenditures. The chart below shows the 3-month average of firms expectations of economic improvement (currently at the LOWEST level on record of -22.67%) compared with expectations of future employment and capital expenditures.

With the decline in economic expectations the most recent report showed reductions in inventory demand, continued concerns about future capital expenditures and not surprisingly job creation plans deteriorated sharply.

According to the NFIB survey: "Overall, owners reported a tiny increase in job creation, adding an average of 0.03 workers per firm, better than November’s -0.04 reading, but both roughly '0'. The percent of owners reporting hard to fill job openings fell 1 point to 16 percent of all owners. This measure is highly correlated with the unemployment rate, so the NFIB survey anticipated little or no improvement in the rate. Job creation plans weakened substantially, falling 4 points to a net 1 percent planning to increase employment."

The chart below shows the high correlation between employment and the NFIB's job creation plans. This doesn't bode well for continued employment expansion.

Importantly, the increases in payroll taxes from the recent "fiscal cliff" resolution could have a greater impact on consumption than expected in the months ahead. With "poor sales" and "taxes" being two, of the top three, concerns by small businesses currently - it is unlikely that there will be any substantial improvement in economic outlooks in the months ahead.

"Seventy percent of the owners characterize the current period as a bad time to expand; one in four of them cite political uncertainty as the top reason. This 'uncertainty' is likely to be a headline player for at least the first half of 2013. As the year progresses, those looking for some meaningful progress on the deficit are likely to be disappointed. Spending will not be cut in any substantial way. Many new 'taxes' will be imposed. The Federal Reserve will keep financing the deficit, continually expanding its portfolio. Eventually the Federal Reserve will be able to declare victory (unemployment rate at 6.5%) even if its policies are benign or even mildly counterproductive."

"The uncertainty surrounding the economy that currently exists limits the ability for businesses to plan...For businesses their outlook is driven by those silly little economic factors like supply, demand and profits.

It is important to view this report from the perspective of the business owner. Business owners are some of the best allocators of capital and resources. They spend money to increase production, expand facilities and hire employees to meet increasing demand. They operate within the confines of the real economic environment, rather than theory, and the results of the recent election point to a tougher economic climate ahead.

Until there is an improvement in the uncertainty that surrounds the economy there is likely very little headway that will be made in the months to come. While further stimulative programs may boost asset markets in the near term it is unlikely that the engines of economic growth will kick in until debt levels are reduced, tax policies are clarified and the regulatory environment is cleared."

The current survey was completed prior to the last minute "fiscal cliff" deal that raised taxes on small business owners and employers. It is unlikely that higher tax rates will spur businesses to expand employment, make capital expenditures or increase production. Furthermore, with the resolution to the upcoming debt ceiling likely resulting in few, if any, real spending cuts the worries about future economic strength will likely persist.

The January survey will be very telling as to the perceived impact of the new tax rules on small businesses. Overall, there is really very little positive to point out in the most recent report. The environment within which small businesses operate doesn't seem to be improving currently.

Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In